Silicon Valley is supposed to be a place where a couple of guys in a garage or a dorm room can start companies that change the world. It happened with Apple and Microsoft in the 1970s, AOL in the 1980s, Amazon, Yahoo, and Google in the 1990s, and Facebook in the 2000s.
For the past ten years, a lot of faith was placed in start-up companies to rejuvenate what seemed to be a continuously crushing economy; startups were considered the ultimate hubs of innovation, the viable answer to unemployment, the most decisive factor of social and technological disruption. Especially in the tech industry, startups seemed to emerge one after the other; a kind of grassroots originated, decentralized version of Silicon Valley. But after 2010, we seem to be suffering from a startup drought. People are still starting startups, of course. But the last really big tech startup success, Facebook, is already 13 years old.
Several comments can be made. First, the number of startups that actually survived to this day – albeit having a positive impact on national economies – always accounted for a small percentage among the hundreds of start-up companies competing for investment funds. A staggering 90% of them crashed and burned and no client, entrepreneur or venture capitalist ever heard of their work again. Some investors suggest that the early internet pioneers grabbed the “low-hanging fruits” occupying lucrative niches like search, social networks, and e-commerce. By the time latecomers like Pinterest and Blue Apron came along, the pickings had gotten slimmer.
But even worse, the fact is startups are now shrinking; the number of new business launches is at a 30 year low in USA. Some economists, investors and entrepreneurs are pointing their fingers at big tech. It seems to me that we have arrived at a tipping point where the tech giants are using their tremendous market power to block, control or even postpone innovations, according their business interests.
The fact is startups are now shrinking; the number of new business launches is at a 30 year low in USA
Vox’s Timothy Lee recently wrote that “Today’s technology giants have become a lot more savvy about anticipating and preempting threats to their dominance. They’ve done this by aggressively expanding into new markets and by acquiring potential rivals when they’re still relatively small. And, some critics say, they’ve gotten better at controlling and locking down key parts of the internet’s infrastructure, closing off paths that early internet companies used to reach a mass market”.
As a result, an industry that used to be famous for its churn is starting to look like a conventional oligopoly — dominated by a handful of big companies whose perch atop the industry looks increasingly secure.
John Evans, from TechCrunch, confirms the trend. “We live in a new world now, and it favors the big, not the small. The pendulum has already begun to swing back. Big businesses and executives, rather than startups and entrepreneurs, will own the next decade; today’s graduates are much more likely to work for Mark Zuckerberg than follow in his footsteps”.
In just 10 years, the world’s five largest companies by market capitalization have all changed, save for one: Microsoft. Exxon Mobil, General Electric, Citigroup and Shell Oil are out of the list and Apple, Alphabet (the parent company of Google), Amazon and Facebook have taken their place. They’re all tech companies, and each one dominates its corner of the industry: Google has an 88 percent market share in search advertising, Facebook (and its subsidiaries Instagram, WhatsApp and Messenger) owns 77 percent of mobile social traffic and Amazon has a 74 percent share in the e-book market. In classic economic terms, all three are monopolies.
For one thing, the deep pockets and resources of companies like Facebook, Google, Amazon and Apple – with a combined value of almost $2.5 trillion – make it increasingly difficult for startups to compete or attract investment. It is only logical that conglomerates the size of Google change the nature of competition internationally, making Silicon Valley the largest and most resourceful opponent for smaller scale businesses. Tech giants owe their exponential growth in part to innovation, but their economic growth is also stimulated by huge tax avoidance. Of course, every big American corporation tries to limit the tax bill. But these companies can afford to push the limits of acceptable tax behavior, because a. they develop innovative tax avoidance international networks much faster than any governments response, and b. they have paid such care and attention to Washington. They have built massive lobbying operations that pace the halls of the regulatory agencies and Congress, stacked with skillful hacks. Google executives set foot in the Obama White House more often than those of any other corporation – its head lobbyist visited 128 times. Google spent about $17m on influence peddlers of both partisan varietals.
Even multibillion-dollar startups like Snap, Snapchat’s parent company, struggle to compete against these tech titans. Snapchat’s case received a lot of publicity not only because of the app’s vast popularity, but also due to Facebook’s unbelievable competitive attitude towards it. At first, Facebook played nicely, making an offer to buy Snapchat – a strategy that worked with Instagram and WhatsApp. When that failed, Facebook used its $510bn resources to literally clone all of Snapchat’s features relentlessly, until Snap’s potential slice of the advertising market shriveled to a sliver. Then, Snap was nipping at the heels of Facebook.
For Amazon partnered startups, things are equally tough. Nucleus was an Alexa-powered tablet computer that focused on video conferencing and communication, with a plan – that Amazon’s investment arm would have seen – to move into other areas. Amazon’s investment arm funneled $5.6m into Nucleus after a year of discussions. But a year later, Amazon launched the Echo Show: an almost perfect clone of the Nucleus product. For would-be Amazon partners, this is just the latest cautionary tale about the risks of doing business with the online retail giant: No matter what the company says, there are no equal partnerships when Amazon is involved.
From here on in, the existing tech titans will accrue ever more power, and startups will be increasingly hard-pressed to compete
It’s not just a problem within the tech industry. Since 1980, the share of companies less than a year old has almost halved in USA – from 15% of companies to just 8.1%, according to Census Bureau data. The total number of startups formed in 2015 (the last year surveyed) was 414,000 – a huge drop from the pre-recession figure of 558,000 in 2006. The start-up slump has far-reaching implications. Small businesses in general are often cited as an exemplar of economic dynamism. But it is start-ups —particularly the small subset of companies that grow quickly — that are key drivers of job creation and innovation. Perhaps most significant, start-ups play a critical role in making the economy as a whole more productive, as they invent new products and approaches. Now the existing businesses are forced to compete or fall by the wayside. Unfortunately, there is evidence they are, massively, doing the latter.
Allow me to finish by quoting John Evans once more. “Because we’ve all lived through back-to-back massive worldwide hardware revolutions — the growth of the internet, and the adoption of smartphones — we erroneously assume another one is around the corner, and once again, a few kids in a garage can write a little software to take advantage of it. But there is no such revolution en route. The web has been occupied and colonized by big business; everyone already has a smartphone, and big companies dominate the App Store; and, most of all, today’s new technologies are complicated, expensive, and favor organizations that have huge amounts of scale and capital already…From here on in, the existing tech titans will accrue ever more power, and startups will be increasingly hard-pressed to compete.”